As many people are aware, Proposition 19 recently passed in California, bringing with it much surprise and uncertainty. With so many people calling and asking about what they should do and how it will affect them, we thought we would provide some basic information. However, the most important takeaway from this article should be that it depends entirely on your personal situation.
The Property Tax Exclusion
First, Proposition 19 does not entirely undo the current law – it just changes a few things. Granted, those things can mean huge tax changes for some people in the future. Keep in mind that this change in law affects future transfers, not transfers that have already occurred. This means that if you inherited your home from your parents, and the transfer has already been made, the property taxes won’t suddenly change. We’re talking about any transfers of property that take place after Feb. 16, 2021, which is when the new law officially goes into effect.
Under Proposition 19, your primary residence can still transfer to your children or grandchildren without triggering a reassessment of property taxes. However, whereas under the current law there were no additional requirements for the exclusion of your primary residence, under the new law, your primary residence will now have to be the primary residence of the children or child inheriting the property as well. Under Proposition 19, if it is both your primary residence and will be your child’s primary residence, the exclusion will still apply and your child will still receive an exclusion from reassessment (meaning, your child will still be able to pay the same property taxes that you are currently paying).
The tricky part is where your child does not intend to live in your home as his or her primary residence. Under the new law, that would mean there is no exclusion from reassessment, and the property taxes would be reassessed and increased upon your death.
Additionally, whereas there was previously no limit on the value of your primary residence transferred, there will now be a limit on this transfer of the current assessed value plus up to $1 million.
Another change is for any property that is not considered your primary residence, including rental properties, vacation properties, etc. For any additional such properties that are not considered your primary residence, there will no longer be an exclusion from reassessment for transfers from parent to child (or vice versa) at all. This is the change that has many people concerned, and there are few ways around it.
For many (which are most of the calls I am currently receiving), the most obvious option is to transfer the property now before the new law goes into effect. I would highly caution anyone considering this to consult with an attorney before transferring any property. There are various other tax ramifications and liability issues that are triggered when you transfer property. As a result, you could inadvertently be causing yourself or your children more harm than good in the long run.
Should you decide to transfer property to your children, they could lose a valuable step-up in tax basis for the property when you pass. This can cost thousands of dollars or more when the time comes. You would also be subjecting the property to any liability or creditors that your children have, allowing your children to take loans or otherwise encumber the property, or simply lose control of the property in general.
The Property Tax Transfer
Under the current law, there was essentially a one-time allowance for any person older than 55 to transfer the property tax basis of their current residence when they moved. The goal was to prevent those from downsizing or moving closer to family from ultimately paying more because the property taxes on the new home were so much higher. Not very much changes with the new law: Now you will be able to use this exclusion transfer up to three times, and you can use it anywhere in California (instead of being limited to the same counties or certain other counties that allowed for it).
The current law allows for certain exclusions for those whose homes were affected by a disaster. Under Proposition 19, this remains true, with a few changes. Most notably, the relief previously only applied to disasters for which the governor declared a state of emergency. Now, it will include wildfires and natural disasters declared by the governor. It also includes a transfer to a new home anywhere in California, rather than in the county you lived or specific counties that authorized transfers.
However, beware: The new law changes this exclusion to only apply to a principal residence, instead of any property. It also limits the timing such that you have two years to purchase or build a new home, rather than five years.
For more information, the California Board of Equalization (BOE) has recently created a website specifically to provide information on the new law. It also includes a handy table that breaks down and provides a comparison of the old and new law.
Based on these new changes, it is now more important than ever to understand how property transfers, along with the benefits and drawbacks of property transfers. A trust, will, or other estate plan tool can significantly help in avoiding costly mistakes.
To find out more information or to ask specific questions, feel free to set up a consultation with Patton Law Group via video chat, phone, or email.